Summary of 2005 Mid-Year CEO Speech July 20, 2005

Presented by Takeo Fukui, President and CEO

TOKYO, Japan-Honda began a new 3-year Mid-term business plan this spring.

Takeo Fukui, President and CEO

The goals for the previous 3-year business plan were to provide new value to 20 million customers worldwide and to maintain Honda’s spirited independence. These goals were established in order to help fulfill Honda’s 2010 vision -- to become a company that society wants to exist. Fortunately, Honda accomplished these goals during the past 3-year business plan, reaching annual sales of 20 million units worldwide including motorcycles, automobiles, and power products.

For the new 9th Mid-term plan, Honda will further pursue its efforts to become number one in the world in creating new value for our customers by strengthening the core characteristics that make Honda unique — that is to further advance initiative, technology, and quality. Our goal is to establish Honda as a brand that people trust and identify with by further strengthening Honda’s spirit of innovation and creativity.

< Powertrain Innovation >
At last year’s mid-year press conference, I explained how we would focus on creating new value by strengthening the core characteristics that make Honda unique in four key areas — R&D, manufacturing, sales and service, and the “Leader Function” of our factories in Japan.

Among these focal areas, R&D is the source of the innovative technologies and products that make Honda unique. And at the foundation of Honda’s product competitiveness is the powertrain, including the engine, transmission, and motor. The powertrain is the key factor in making our products fun-to-drive and it is the foundation technology that enables Honda to continue to provide the joy of mobility to people around the world while also reducing any negative impact on the environment, including exhaust emissions and CO2 emissions.

Thus, looking ahead, Honda will pursue further powertrain innovation as a source of Honda’s competitiveness in each product segment including motorcycle, automobile, power products, and next generation mobility .

< Environment — Motorcycle, Automobile, Power Product >
Understanding of Environmental Issues


There are three primary environmental challenges facing society: 1) achieving cleaner exhaust emissions in the effort to reduce air pollution, 2) reduction of CO2 emissions via improved fuel efficiency in the effort to reduce the threat of global warming, and 3) development of alternative energy sources, such as fuel cells, in the effort to address the future depletion of petroleum-based energy.


Honda has long been committed to these issues and made achievements beyond government regulations. In 1972, Honda’s CVCC engine became the world’s first engine to meet the requirements of the 1970 Clean Air Act, and the Honda Civic with this CVCC engine became the most fuel efficient automobile in the U.S. for four consecutive years. Today, Honda leads the auto industry in the U.S. in terms of average fuel economy (CAFE). In Japan, Honda has already cleared 2010 fuel economy standards in all vehicle weight categories .


Emission levels have been reduced to one-thousandth compared to the level of 40 years ago.


Technologies to achieve cleaner emissions are becoming well-established. For example, the Honda Accord has earned SULEV certification in the U.S. which means that in some locations it emits a lower concentration of hydrocarbon emissions than the surrounding air.


From the viewpoint of environmental protection, Honda will accelerate its challenge to reduce CO2 emissions as an effort against global warming.


Until fuel cell technology, a next-generation power source, reaches the point of mass market use, internal combustion engines – including gasoline, gas-electric hybrid, natural gas and diesel – will remain the dominant power source of passenger vehicles for the next few decades. Honda believes that one of the most effective environmental protection efforts we can pursue at this moment is to improve the efficiency of internal combustion engines -- which are the primary means to enable people to enjoy the freedom of mobility – in the effort to minimize CO2 emissions in the atmosphere.


With current technologies, a portion of fuel energy is lost due to friction, thermal losses, and pumping losses, and thus it is not possible to use 100% of fuel energy to power a vehicle. Honda is committed to the development of various new technologies that minimize energy losses and maximize energy efficiency.


One such internal combustion engine technology is the gas-electric hybrid system which electrically regenerates energy produced during deceleration, which otherwise would have been lost as heat generated by the brake system, and then reuses the energy for acceleration. By improving the efficiency of the engine, the energy efficiency of the entire hybrid system can be further improved.


A comparison between the Accord Hybrid and the regular Accord V6 presents a good example. In city driving, 60% of the fuel economy improvement comes from the hybrid system. For highway driving, on the other hand, the Variable Cylinder Management system accounts for 57% of the improvement, exceeding the contribution of the hybrid system. In other words, a hybrid system can make a bigger contribution to the improvement of energy efficiency under diverse driving conditions and to the environment when combined with a more efficient engine.


Following are the directions Honda will pursue to improve the efficiency of its engines for our  automobiles, and power products.

< Automobiles >


Achievement and plans for fuel economy improvement for automobiles:
With introduction of the all-new Civic this year, Honda will complete the shift to its next generation i-series engines for almost all models. With VTEC technology at the core, Honda has established distinctive technologies to improve fuel economy, including VCM. As a result, this new series of engines has achieved approximately a 20% improvement in fuel economy.

For the 9th Mid-term, Honda will further advance VTEC technologies, introduce new technologies to control air intake with a continuously variable valve control system, and further advance existing VCM technology. These new technologies will be applied to key models within this Mid-term.


Advanced VTEC
An advanced VTEC engine, scheduled to be introduced at the end of the 9th Mid-term, dramatically reduces pumping losses by controlling engine aspiration through continuously variable control over the amount of intake valve lift and phase of valve switchover timing. With innovative valve control and control of the length of the intake manifold, combustion efficiency will be increased by 13% compared to current i-VTEC engines.


Advanced VCM
VCM was first introduced with the Inspire model in 2003. By increasing flexibility in the number of cylinders that are cut off, further advancing variable valve systems and improving the performance of active control engine mounts, the advanced VCM technology should achieve an 11% improvement in fuel economy compared to a Honda V-6 engine.


Honda will apply these advanced VTEC and VCM technologies to mass-market products by the end of the 9th Mid-term and then expand them to other models as core automobile engine technologies to further improve fuel economy.

Fuel economy improvement goals
Advanced VTEC: 13% improvement (vs. 2005 regular i-VTEC engine)
Advanced VCM: 11% improvement (vs. 2005 Honda V-6 engine)



< Power Products/general purpose engines >


Achievement and plans for fuel economy improvement for power products:
Honda has been an industry leader in providing engines with high environmental performance. Honda has introduced GX and GC series engines which use OHV (overhead valve) and OHC (overhead cam) technologies. Also, Honda has introduced a cleaner, 4-stroke, 360-degree inclinable engine –-M4 series— to the handheld market where 2-stroke engines were the mainstream. Moreover, with the iGX engine, by incorporating intelligent control through an electronically-controlled STR (Self Tuning Regulator) as a core technology, Honda achieved the industry’s best environmental performance and ease of operation. Honda will continue to expand application of STR technology through a series of engines, while continuing development of further engine advances.


Honda is currently developing an innovative next-generation general propose engine. This high expansion ratio engine has a mechanism to vary the intake/compression stroke, and expansion/emission stroke. This newly developed engine has already proved operational in the test lab. This innovative technology achieves an ideal Atkinson cycle and makes it possible to improve fuel economy by 20%.


For the 9th Mid-term, Honda will expand application of intelligent technology and introduce an innovative high expansion ratio engine to the market. Honda will continue to be an industry leader in the area of environmental technologies for general purpose engines.

Fuel economy improvement goals:
Further application of STR technology: 15% improvement (vs. 2005)
High expansion ratio engine: 20% improvement (vs. 2005)



< Hybrid >


As mentioned earlier, Honda believes that improvement in the efficiency of internal combustion engines will make a significant contribution for environmental efforts. In addition to the efficiency of the engine itself, the efficiency of the IMA system should be improved to make a major contribution to the reduction of CO2 emissions.


Honda recently announced development of a 3-stage i-VTEC engine and IMA system for the next generation Civic. Honda will further advance IMA technology to improve total efficiency.



< Fuel Cell >


Honda will accelerate the development of fuel cell vehicles, the ultimate environmental technology beyond the internal combustion engine. Already, the Honda FCX has reached the stage where we have begun lease sales to individual customers. By applying Honda FC stack technology developed for automobiles, Honda is aiming to launch a fuel cell motorcycle model for lease by 2009.




< Alternative Fuels >


Natural gas
Honda first introduced the natural gas-powered Civic GX in 1998. This year, Honda began sales in the U.S. of a home-refueling appliance called “Phill” to enable the refueling of Civic GX at individual households. Honda will further promote sales of Civic GX.
In Japan, Honda has sold a total of 17,000 units of a household cogeneration unit that uses city gas (natural gas) as well as LPG gas as a fuel to supply electricity and heat. The amount of CO2 emissions reduced through the use of 17,000 cogeneration units is equivalent to the amount reduced by 1 million trees or by a forest that is 200 times as large as the Tokyo Dome. Honda will begin pre-launch trial sales in the U.S. this year, preparing for the official mass market introduction in the U.S. next year.


Ethanol
Ethanol fuel is widely used in Brazil. Since the mid-1980s, Honda has been offering motorcycles and then automobiles that accept ethanol-gasoline fuel. The percentage of ethanol has increased from 10% to 20% and 25%, and now 100% ethanol fuel, called E100, is also available in the market. Honda will introduce a FlexFuel car that accepts ethanol contained fuel at any percentage, before the end of 2006.


Honda will continue to pursue efforts to utilize various non-gasoline energy sources, which is expected to have a large impact on the reduction of CO2.



Honda will continue its challenge to introduce and expand use of innovative powertrains in all product categories, with the goal to achieve the best fuel economy in each category.

Business Topics:
< New Civic >


The Honda Civic, a true global car, will undergo a full model change this year.


The all-new Civic was developed with four body types to meet the unique requirements of each region. For the Japanese market, an emotional and stylish sedan which goes beyond the concept of the traditional Civic was developed. For the U.S. market, 2-door and 4-door types were developed, while a 4-door was also developed for Asia and 3-door and 5-door types were developed exclusively for Europe. The all-new Civic, developed under our approach of creating products to meet the needs of local customers, is a true global car with sales of more than 600,000 units annually in 160 countries in the world and with production in six regions, now to include China, where Civic production will begin next year. For the new Civic, Honda will offer an advanced powertrain lineup that includes various fuel options including gasoline, diesel, hybrid, CNG and ethanol – to meet the unique needs of each region.


< NSX successor >
We are now focused on the development of a new model to succeed the NSX for a new era. We would like to debut a new super sports car equipped with a V10 engine in 3 to 4 years. Please look forward to seeing the NSX successor.

< HondaJet >
HondaJet will make its first public demonstration flight next week, July 28, at EAA AirVenture 2005, an annual exhibition of experimental aircraft, held in OshKosh, Wisconsin. Since its maiden flight in December 2003, HondaJet has taken numerous test flights. Total flight time to date has reached 150 hours, and HondaJet has so far achieved its maximum altitude of 13,000 meters and maximum speed of 728km/h. Honda will continue its testing efforts for HondaJet which improves fuel efficiency by 40% compared to existing aircrafts in its class by combining excellent aerodynamic performance with the high fuel efficiency of Honda’s HF118 engine.

Conclusion
Honda is committed to further advancing powertrain technologies in order to offer new products and technologies that satisfy growing demand from customers around the world for high fuel efficiency and to achieve more environmentally-friendly mobility that more people can enjoy. Honda will continue to dedicate company resources to the creation of new technologies. Honda will also continue making capital investments proactively to strengthen the flexibility and efficiency of its global production network.

Setting customer satisfaction as our number one priority, Honda strives to provide the joy of mobility to even more customers through the introduction of new technologies and new products. When this is achieved, our sales should reach approximately 16 million units for motorcycles, approximately 4 million units for automobiles, and approximately 6.5 million units for power products by the end of the 9th Mid-term. In terms of sales revenue, this will exceed 10 trillion yen.

Through all of these efforts, Honda’s goal is to be a company that society wants to exist, to pursue the joy of mobility, and to extend this joy to more customers and to future generations.